'Weak' Inflation, Strong Dollar Means Rate StaysThursday, June 05, 2014 > 09:50:04
(The StarPhoenix – Gordon Isfeld)
It's not much of a stretch to surmise Canada's monetary minders are not too happy with a stronger dollar and they are doing whatever they can to rein it in.
But, at the same time, continuing to point to an economic threat from a perceived still-weak inflation climate might be a bit of a push.
The Bank of Canada highlighted both concerns for keeping its key interest rate on hold Wednesday, while also warning that the domestic economy has been performing at a below-par pace and growth in the United States has likewise been slower than hoped for.
But policy-makers didn't budge on their neutral stance on the next rate move, up or down. And analysts agree any decision on adjusting borrowing costs – and that will likely be a hike – is still at least a year off.
It's already been a long wait, stretching back to September 2010, when the central bank locked in its benchmark lending level at one per cent amid struggling economic growth after the recession - a troubling pattern that has resurfaced. In Canada, growth slowed to 1.2% in the first quarter – when the Bank of Canada was looking for 1.5% expansion after a fourth-quarter pace of 2.9%.
Canada's overall inflation rate, the main focus of monetary policy, strengthened in April to two per cent – the midway point of the bank's one per cent-to-two per cent target zone. Policy-makers, led by Governor Stephen Poloz, say the higher rate of annual price increases has come "sooner than anticipated," but that is "largely due to the temporary effects of higher energy prices" and a stronger Canadian dollar.
The Canadian dollar weakened to around 91.39 US cent after the Bank of Canada announcement, down from Tuesday's closing level of 91.66 US cents. "Even though they never say it, I do believe the (stronger) Canadian dollar was not entirely welcome at the bank, and they're probably relatively satisfied with the market reaction (on Wednesday)," said Douglas Porter, chief economist at BMO Capital Markets. "I would say he (Poloz) downplayed the outlooks for both inflation and growth."